Congressional Budget Office

Analysis of Approaches to Reduce Federal Spending on Military Compensation

Western Economic Association, 90th Annual Conference

July 1, 2015

Carla Tighe Murray, Ph.D. Senior Analyst, National Security Division

This presentation provides information published in Cost Estimate for S. 1376, National Defense Authorization Act for Fiscal Year 2016 (June 2015), www.cbo.gov/publication/50266; Long-Term Implications of the 2015 Future Years Defense Program (November 2014), www.cbo.gov/publication/49483; Growth in DoD’s Budget from 2000 to 2014 (November 2014), www.cbo.gov/publication/49764; Options for Reducing the Deficit: 2015 to 2024 (November 2014), www.cbo.gov/budget-options/2014; and Costs of Military Pay and Benefits in the Defense Budget (November 2012), www.cbo.gov/publication/43574.

1 CO NGR ES S IO NA L B UDGE T O F F IC E

Most years, the Department of Defense (DoD) has projected that the costs of its plans would exceed funding caps for discretionary funding set in the Budget Control Act of 2011.

2 CO NGR ES S IO NA L B UDGE T O F F IC E

Amounts by Which DoD’s Projections of Costs Exceeded the Caps

0

10

20

30

40

50

60

2014 2015 2016 2017 2018 2019 2020

Billions of Dollars

2014 Future Years

Defense Program

2015 FYDP

2016 FYDP

a. For 2015, DoD requested $496 billion in its base budget in the 2015 FYDP, which equaled the cap set by the Budget Control Act for that year. Funds for overseas contingency operations are not subject to the caps and are not shown here.

a

3 CO NGR ES S IO NA L B UDGE T O F F IC E

The appropriation for Military Personnel (which includes pay and benefits) has been one of the major growth areas in the defense budget.

4 CO NGR ES S IO NA L B UDGE T O F F IC E

The Department of Defense’s Base Budget, Adjusted for Inflation, Fiscal Years 2000 and 2014

Billions of 2014 Dollars

2000 20140

100

200

300

400

500

600

Military Personnel(46% increase)

Operation andMaintenance(34% increase)

Acquisition(25% increase)

Other (43% decrease)

5 CO NGR ES S IO NA L B UDGE T O F F IC E

Growth in the appropriation for Military Personnel is even more striking because active end strength has declined slightly since 2000.

War-related increases in the end strength of the Army and Marine Corps were offset by reductions in the Navy and Air Force.

DoD’s total end strength fell by 3.3 percent, from 1.38 million in 2000 to 1.34 million in 2014.

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The Services’ Active End Strength

Note: End strength is the number of personnel on the rolls as of the final day of the fiscal year.

Thousands

100

200

300

400

500

600

2000 2002 2004 2006 2008 2010 2012 2014

Army

Navy

Air Force

Marine Corps

7 CO NGR ES S IO NA L B UDGE T O F F IC E

A significant amount of military compensation is in the form of noncash or deferred benefits.

8 CO NGR ES S IO NA L B UDGE T O F F IC E

The Composition of Military Compensation in the President’s 2016 Budget Request

Note: Data exclude the funding requested for overseas contingency operations (OCO). Veterans’ benefits are omitted because they are not part of DoD’s budget.

Billions of 2016 Dollars

Cash

Basic Pay 52.3

Housing and Subsistence Allowances 24.3

Other Types of Pay and Allowances 15.9

________________________

Total 92.5

Noncash/Deferred Compensation

Health Care 32.9

Retirement Accrual 16.4

Retiree Health Accrual 6.2

Schools 3.1

Family Housing 1.4

Commissaries 1.2

Other (Including child care, family support, and fitness centers) 3.5

________________________

Total 64.7

9 CO NGR ES S IO NA L B UDGE T O F F IC E

Four Options to Reduce Spending on Military Compensation

Option Reductions in Outlays Over a 10-Year Period

1. Cap Increases in Basic Pay for Military Service Members $25 billion

2. Replace Some Military Personnel With Civilian Employees $19 billion

3. Increase TRICARE Cost Sharing for Retirees $20 billion to $71 billion

4. Eliminate Concurrent Receipt for Disabled Veterans $108 billion

Note: Estimates were prepared in November 2013 and spanned the 2014–2023 period.

10 CO NGR ES S IO NA L B UDGE T O F F IC E

Reforming military retirement is another approach to reducing spending.

The current defined benefit system pays benefits equal to 50 percent of the average of the 36 highest months of basic pay (often called high-3), but only to the 17 percent of enlisted members (or 50 percent of officers) who reach 20 years of service.

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Percentage Remaining in the Military as Years of Service Increase

12 CO NGR ES S IO NA L B UDGE T O F F IC E

In industry, the trend has been away from the defined benefit plans and toward defined contribution plans, typically with employer matching (like the Thrift Savings Plan) or hybrid plans.

13 CO NGR ES S IO NA L B UDGE T O F F IC E

Types of Retirement Plans in Industry

Source: Military Compensation and Retirement Modernization Commission.

Percentage of Fortune 100 Companies

14 CO NGR ES S IO NA L B UDGE T O F F IC E

Key Provisions in the Senate-Passed Version of the National Defense Authorization Act for Fiscal Year 2016 (H.R. 1735)

Provision Description

Reduce the Defined Benefit The multiplier decreases (so service members retire at 40% rather than 50% of high-3 basic pay).

Retirees may choose a lump-sum in place of all or part of a retirement annuity until age 67.

Add a Defined Contribution With Government Matching

The government makes a standard contribution of 1% of basic pay on entry.

For years of service 2 through 20, the government pays an additional matching contribution (1 for 1) up to 4% of basic pay.

Funds are available to withdraw starting at age 59½ without tax penalty.

Add Continuation Pay to Preserve the Current Force Structure

Continuation pay begins at 12 years of service from 2.5 times monthly basic pay (active) or 0.5 times active-equivalent monthly basic pay (reserve).

Allow Switching to the New System Active members who are currently serving may switch to the new system during a one-time opt-in period.

15 CO NGR ES S IO NA L B UDGE T O F F IC E

CBO estimates show that the Senate-passed retirement proposal would increase the deficit but reduce DoD’s spending over 10 years.

16 CO NGR ES S IO NA L B UDGE T O F F IC E

The Budgetary Effects of the Senate-Passed Proposal for Military Retirement (H.R. 1735)

Millions of Dollars

Total, 2016–2025 Mandatory Outlays

Annuity payments -1,200 Lump-sum payments in lieu of annuity 3,320

___________

Total 2,120

Revenues -1,088

Net Effect on the Deficit of Change in Mandatory Outlays and Revenues 3,208

Discretionary Budget Authority Government contributions 13,030 Continuation payments 8,090 Accrual payments to the military retirement trust fund -42,240

_____________

Net Change in DoD’s Discretionary Budget Authority -21,120